When Congress was debating an extension of the renewable energy tax credits set to expire at the end of 2008, the loudest argument from the wind and solar industries was that letting the tax credits expire would have a deleterious affect on renewable energy development in the United States. And before the credits expired, Congress passed a short term extension of the renewable energy production and investment tax credits.

But then the credit markets froze. There was little to no money to borrow to get projects off the ground. At that point, the extension of the production tax credit was almost moot.

Recognizing this, the authors of The American Recovery and Reinvestment Act of 2009 addressed some of the problems created by the credit freeze by authorizing the Treasury Department to make immediate, direct payments to companies for projects—in lieu of tax credits—for an estimated 5,000 bio-mass, solar, wind and geothermal energy facilities.

And on Thursday, Energy Secretary Steven Chu and Treasury Secretary Tim Geithner together announced that they were ready to start doling out that cash, or at least how they would dole it out.

The thinking behind the move is that developers will not have to wait until they have a project in production in order to take advantage of the federal tax benefit. The new grant program essentially front-loads the tax benefit, freeing-up money for material, labor and other investments in project development.

“The renewable energy program provides another important avenue for the Recovery Act to contribute to economic development in communities around the country,” said Treasury Secretary Tim Geithner. “This partnership between Treasury and Energy will enable both large companies and small businesses to invest in our long-term energy needs, protect our environment and revitalize our nation’s economy.”

Preventing another renewable energy bust

The $3 billion in grants are designed to temporarily replace the production tax credit (PTC) that has been a critical factor in the growth of renewable energy capacity in U.S. The boom-and-bust cycles caused by lapses in the PTC have been particularly troublesome for the wind energy industry. In the two times the tax credit was let to expire, once in 2002 and again in 2004, new U.S. wind power capacity fell precipitously, taking with it, a burgeoning U.S. wind industry.

The specter of another bust in the renewable energy industry had industry groups welcoming the Thursday move.

“The implementation of this program for renewable energy will be a welcome boost, just when we all need it,” said American Wind Energy Association CEO Denise Bode. The grants can amount to as much as 30% of the value of a new wind project, explained Bode.

“As with all industry, the economic conditions of the past eight or nine months have held us back. We believe these grants will help get our companies back on track, create more jobs, and balance our electricity portfolio with clean, renewable energy.”

Solar industry groups welcomed the move as well, emphasizing the fact that it would free-up several projects in various phases of development.

“Solar stimulus is ready, set and … coming soon,” said said Rhone Resch, CEO of the Solar Energy Industries Association (SEIA). “Once Treasury begins accepting grant applications, the solar industry will create tens of thousands of jobs and spur investment in the clean energy economy.”

“There are dozens of large solar power projects in the pipeline that can now move forward,” added Resch.

The Treasury will be launching the web-based application system in the coming weeks and begin making direct payments within 60 days after projects are submitted.